Futures Contracts and Margin Requirements Quiz

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Which type of ownership tends to move up and down in straightforward ways with the value of the stocks and/or bonds?

Traditional portfolios (correct)
Mutual funds
Derivatives market
Options

What is the key difference between options and futures or forward contracts?

Options can be customized, while futures and forward contracts are standardized.
Options are not compelled to buy or sell, while futures and forward contracts carry the obligation to go through with the agreed-upon transaction. (correct)
Options carry the obligation to go through with the agreed-upon transaction, while futures and forward contracts do not.
Options can be exited by buying/selling a contract with opposite terms, while futures and forward contracts cannot.

How can futures contracts be exited before maturity?

By customizing the contract for specific trade partners
By holding the contract until maturity
By transacting with a centralized futures exchange
By buying/selling a contract with opposite terms (correct)

What is the main difference between forward contracts and futures contracts?

Forward contracts are customized, while futures contracts are standardized. (A) Signup and view all the answers

What do futures and forward contracts specify?

Purchase or sale of some underlying security at some future date (A) Signup and view all the answers

What is the purpose of leverage in the derivatives market?

To increase potential returns (D) Signup and view all the answers

Which of the following is a benefit of using standardized contracts that trade on an exchange?

All of the above (D) Signup and view all the answers

Which of the following assets can be traded using standardized contracts on an exchange?

Commodities (A) Signup and view all the answers

Which of the following best describes the role of hedgers in the futures market?

Seek protection from price movement (B) Signup and view all the answers

Which of the following best describes the role of speculators in the futures market?

Seek to profit from price movement (C) Signup and view all the answers

What is the purpose of futures contracts in the futures market?

To provide a means of hedging against price movement (D) Signup and view all the answers

What is the role of margin in futures trading?

To require participants to post and maintain collateral (B) Signup and view all the answers

Which of the following best describes the VIX Index?

An index that represents the market's expectations for the relative strength of near-term price changes of the S&P 500 index (D) Signup and view all the answers

What does the term 'basis' refer to in futures trading?

The difference between the futures price and the spot price (B) Signup and view all the answers

When the futures curve is upward sloping, it is referred to as:

Contango (B) Signup and view all the answers

What is the purpose of hedging with futures?

To protect against potential losses in an investment (A) Signup and view all the answers

What is the spot-futures parity theorem?

The two strategies of purchasing an asset now and taking a long position in futures must have the same market determined costs over time (D) Signup and view all the answers

What is the formula for calculating basis risk?

Variability in the basis means that gains and losses on the contract and the asset may not perfectly offset if liquidated before maturity (C) Signup and view all the answers

Which of the following is true about futures contracts?

Margin deposits are used to ensure both parties can meet their financial obligations (D) Signup and view all the answers

What is the purpose of marking to market in futures trading?

To calculate the total profit or loss on a futures contract (B) Signup and view all the answers

How do investors make or lose money with daily marking to market?

By profiting from the daily changes in the futures price (C) Signup and view all the answers

What is the profit per contract if the futures price for silver increases from $20.10 to $20.20 per ounce?

$500 (B) Signup and view all the answers

What is the profit to the short position at maturity if the spot price for a commodity is $20.21 and the initial futures price is $20.10?

$-550 (D) Signup and view all the answers

In which markets are futures contracts commonly used?

All of the above (D) Signup and view all the answers

Which of the following is true about futures contracts?

Futures contracts are purchased on margin (B) Signup and view all the answers

What is the main difference between futures contracts and forward contracts?

Futures contracts are standardized and traded on exchanges, while forward contracts are customized and traded over-the-counter (D) Signup and view all the answers

What is the purpose of marking to market in futures trading?

To adjust the futures contract price based on market conditions (C) Signup and view all the answers

What does it mean to say that futures contracts are purchased on margin?

Investors can buy futures contracts with a small initial investment (A) Signup and view all the answers

What is the difference between contango and backwardation in futures markets?

Contango refers to a market where futures prices are higher than spot prices, while backwardation refers to a market where futures prices are lower than spot prices (B) Signup and view all the answers